The insider's guide to family offices
AT THE TOP OF EUROPE'S WEALTH PYRAMID SIT THE FAMILY OFFICES THAT ADVISE THE SUPER-RICH. THEIR APPROACH IS BASED ON INDEPENDENCE, TRANSPARENCY AND SAVVY ASSET ALLOCATION. AND THERE ARE LESSONS FOR INVESTORS OF ANY SIZE
While the wealth management industry nurses a hangover from the end of the credit-fuelled boom, the discreet offices that manage the financial affairs of Europe’s wealthiest families are enjoying a surge in popularity.
The multifamily offices that have mushroomed in London and Switzerland over the past decade report a stream of enquiries from ultra-wealthy clients alienated by mainstream wealth managers and private banks.
Markus Stadlmann, head of HQ Trust in Frankfurt, a multifamily office established by the descendants of the Harald Quandt family, says: “We’ve had increasing interest simply because the fi nancial and economic crisis has initiated within a number of wealthy families a discussion about how they should go forward.”
Guy Paterson, chief executive of Unigestion’s family investment office, says: “Families who have suffered private banking relationships over the years are asking themselves why?”
Europe’s richest dynasties, such as biotech company owners the Bertarellis and the Rausings, of packaging giant Tetra Pak fame, often prefer to operate their own investment offices, but those with merely tens or hundreds of millions are increasingly favouring private investment offices which cater for a small number of like-minded families.
And the attributes that are attracting the super-rich to these boutique operations – namely independent advice, transparent fees an consistent investment returns – are trickling down to less wealthy clients.
Graham Harvey, a director at wealth consultancy Scorpio Partnership, says: “Think of the aviation industry. Services that were only in fi rst class 10 years ago can now be found in economy.”
William Drake, co-founder of Lord North Street, a London-based multifamily investment office where clients need at least £25m (€28m) in liquid assets, says: “If the way we’re looking at investments is right, why isn’t it right for smaller clients as well?”
The growing sense of dissatisfaction among clients of mainstream wealth managers makes his question more pertinent.
PERFORMANCE
Research conducted by Dow Jones Wealth Bulletin and The Wall Street Journal Europe, to be published next month, shows a large divergence of opinion between how professional wealth managers felt they performed during the credit crunch and what their clients think. While the wealth managers believe they acquitted themselves well, many clients feel they were poorly served and are reviewing their relationships as a result.
The success of multifamily office at the top end of the market may hold the secret to reinventing the industry. The abiding problem with wealth management is the conflict of interest facing most advisers: they are supposed to advise clients on what is best for them in the long run but are incentivised in the near term to sell financial products. While these interests may converge, frequently they do not.
A research paper published in March for the UK’s Centre for Economic Policy Research highlighted the problem.
Andreas Hackethal and Michalis Haliassos, from the Goethe University Frankfurt and Tullio Jappelli from the University of Naples, analysed more than five years of data from a German discount brokerage that gave clients the option of managing portfolios on their own or with the help of an independent fi nancial adviser. They found that clients who used an adviser tended to have lower returns and take a greater degree of investment risk than those who made decisions on their own.
Scepticism over the value and independence of advice permeates the wealth management market. Multifamily offices claim to overcome this by being wholly independent of product providers and having transparent fees.
Of course, it is easy to claim independence but tricky to deliver. Harvey says: “The idea of independence that so many family offices emphasise is often diffi cult to actualise.”
For Stadlmann at HQ Trust, the imperative for family offices is that they act solely as buyers and never as sellers of products. “To be an organization that really serves families well requires independence from intermediaries, like banks,” he says.
The waters are muddied, however, by family offices that expand to off er standalone investment products or even banking services, and by the numerous private banks and wealth managers that also have so-called family office divisions.
Steen Ehlern at Ferguson Partners Family Office says: “Many investment companies claiming to be family offices are nothing more than hedge funds and asset managers looking for clients and assets.”
FEES Whatever claims of independence a wealth manager may make, the truth is only revealed by dissecting the fees they charge. Drake says: “Only one question really gets to the heart of the issue: how are you paid?”
At Lord North Street, the answer is through a fl at fee in basis points, or fractions of a percent, depending on the size of the portfolio. Drake says: “We have absolutely no inhouse funds or products and have a method of charging that leaves us neutral, regardless of the strategy we choose. The fl at basis point charge is every penny we will get, ever.”
This approach is favoured by many multifamily offi ces. They also emphasise that any “retrocessions” they receive from product providers -- kickbacks paid for investing in a particular fund – will be passed on to clients, something that seldom happens in mainstream wealth management.
For family offices that offer varied advisory, consultancy or concierge services, another option is to charge clients for time, much as a lawyer would.
Andrew Rodger, a director at Stonehage, which has 1,000 families and €20bn ($27.3bn) of assets on its books, says investments form only a part of a service which covers all areas of technical, legal, financial and strategic advice a wealthy family might need. He says: “The family office advisory work is charged on a time basis or we sometimes agree a fixed fee. We don’t charge a percentage of assets unless and until our investment team is given a specific portfolio to oversee.”
The third, and most controversial option, is to include some form of performance-related fee. Global Wealth Management, a Geneva-based family office which manages $2bn (€1.5bn) for 25 families, prefers this approach. Peter Sartogo, managing partner, says: “We wanted to be perceived as entrepreneurs for entrepreneurial clients. They like the fact our interests are aligned. It is like sharing a passion.”
INCENTIVE
But others suggest performance fees reintroduce the risk of conflicted interests which the family office structure is meant to overcome. Drake says: “Performance fees create an incentive to take risk with clients’ money.”
HQ Trust also believes in performance-based fees, says Stadlmann, but goes to great lengths to ensure the interests of all parties are aligned. He says: “When we make an investment, the Harald Quandt family, the third-party family and the managers all co-invest. The Quandts are invested in everything as are the management, although other families will not make all the same investments. A fixed fee covers the running costs of the business and we only get more if we meet the objectives of the third-party families.”
The proof that independence and transparent fees work comes only through performance figures. As with most wealth managers, multifamily offices are generally reluctant to divulge returns, claiming the bespoke nature of their portfolios means averages are misleading.
The anecdotal evidence suggests the best-performing offices delivered positive returns last year while the worst saw negative returns in the low teens in percentage point terms. At the lower end, at least, this is not much different from the mainstream wealth industry.
The private client index compiled by Asset Risk Consultants, which tracks the performance of 35 UK-based wealth managers, returned -12.4% for balanced sterling portfolios last year, although dollar returns were lower at -19%.
Nevertheless, Unigestion’s Paterson says: “2008 was a wonderful year for multifamily offices in general in terms of differentiation because it was the first year for a while in which it was easy to spot the difference. Our client portfolios significantly outperformed the private banks and we were able to avoid all the nasty elephant traps.”
Paterson says most of his clients saw their portfolios deliver single digit losses in percentage terms, while the best-performing client portfolios were “up significantly”.
Sartogo at Global Wealth Management says families with conservative, capital preservation strategies finished last year fl at, while those with aggressive mandates were down considerably.
Luis Palacios, founder of Elystone Capital, says his clients were down by about 10% last year. At HQ Trust, Stadlmann says negative returns were in the low teens: “It was nothing to cheer about but was within the range we consider acceptable given the investment approach we take.”
Listed funds run by Sand Aire, a London-based multifamily office, showed negative returns of between 14.7% and 21.7% last year, according to publicly available fi gures – although the funds reflect only a portion of clients’ assets.
On average, it seems likely multifamily offices easily outperformed the broader wealth management industry. But Harvey says returns tell only part of the story. He says “Multifamily offices have been winners from the fi nancial crisis not because they are multifamily offices but because they are independent advisers.
Rather than a flight to quality, there is a flight to advice with clients happy to pay for what they believe to be independent.”
THIS ARTICLE FIRST APPEARED IN THE WEALTH BULLETIN PRINT SUPPLEMENT WITH THE WALL STREET JOURNAL EUROPE
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